The marginal propensity to save (MPS) in a closed economy is 0.1. By how much will national output increase if autonomous expenditure increases by £200?
A) 20
B) 2000
C) 200
D) 1000

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.1, which means the marginal propensity to consume (MPC) is 1 - MPS = 0.9. The multiplier is 1/(1-MPC) = 1/(1-0.9) = 10. An increase in autonomous expenditure of £200 will increase national output by 10 * £200 = £2000.

The Marginal Propensity to Save (MPS) in a Closed Economy